Kennametal Finds the Right Tools

By BARNABY J. FEDER,

Published: May 6, 1992

LATROBE, Pa.—
Kennametal Inc., a leading producer of metalworking and mining tools, quietly spent the 1980's investing heavily in new technology to reverse a market slide and stave off powerful foreign competitors.

By last year, that strategy had propelled it into the ranks of the nation's 500 largest companies, with net income of $21 million and revenue of $618 million. And a more visible sign of success, Kennametal's stylish new $25 million research and development center, opened next to the company's headquarters on the rural outskirts of this small city, an hour's drive east of Pittsburgh.

Kennametal's rebound provides a case study of how even companies in stodgy, slow-growing businesses can use information technology to improve their efficiency and provide new services that turn customers into partners.

Today, Kennametal's information management systems have more in common with trend-setters in retailing, banking and transportation than with those of most of its peers. The company has also invested heavily in computer-based manufacturing.

The investment in information technology has allowed it to serve customers more quickly and reduce inventories. The computer systems have also been used to offer customers additional services, like tool management support. Just like drug distributors who stock pharmacists' shelves, Kennametal now stocks and manages the tool storage areas for some customers.

Even with the lift from its technology successes, Kennametal's financial track record has been poor compared with such high-flying industries as computers and pharmaceuticals. The company's sales and earnings were hit by the 20 percent decline in domestic metal-cutting markets from 1981 to 1985. Nor have all of Kennametal's acquisitions, made in the hope of building a distribution network, been as successful as expected. The stock, which closed yesterday at $34.25, down 75 cents a share on the Big Board, is well under its high of $42 in 1981.

To its credit, though, Kennametal fended off an attempt by Sandvik of Sweden, the giant of the metal-cutting tools industry, to grab dominance in the United States market during the early 1980's. During those same years, Kennametal has doubled its market share in Europe to 8 percent. The heavy investments by the company to preserve its leading position in the slow-growing domestic market have also upped the ante for domestic competitors. One rival, the Carboloy subsidiary of General Electric, was sold in 1987 to Sandvik; another, the Valenite subsidiary of the GTE Corporation, is up for sale as part of GTE's proposed divestiture of electrical products businesses. 'Behind the Times'

The turnaround began with the arrival of Quentin C. McKenna in 1978 as president after a career in the aerospace industry in California. "We were at least a decade behind the times," said Mr. McKenna, who had been general manager of Hughes Aerospace's missile division. The Kennametal he joined was making almost no use of computers outside its accounting office, where an aging Honeywell mainframe and punch cards were used for data processing.

Mr. McKenna, who is a cousin of Philip M. McKenna, the founder of the 54-year-old company, turned over the chief executive job to Robert L. McGeehan in October but continues as chairman.

Mr. McKenna's first move was to call in the International Business Machines Corporation and promise to deal exclusively with the computer giant for four years in return for full-time support in redoing Kennametal's information processing. After a disastrous effort -- too much too quickly with the wrong computer, Mr. McKenna said -- he dismissed his chief information officer and installed John W. Turko, a computer specialist who had been hired just six months previously from Westinghouse. I.B.M. took the computers back, assigned a new representative, and everyone started over.

Mr. Turko, 47 years old, brought several key customers into the planning process and devoted three years to creating a system to allow customers and Kennametal managers to determine within seconds what products were available at Kennametal sites around the country.

"By 1983, we had changed information technology from a liability to an asset," Mr. Turko said. Selected by Saturn

One early payoff came when Kennametal was selected by the Saturn project of General Motors over several experienced tool distributors to be its sole supplier of all metal-cutting tooling, including products that Kennametal itself does not make.

Its success at Saturn helped persuade Kennametal to branch out of its traditional manufacturing business, which is plagued by falling demand as tools last longer and more metal components are replaced by plastics. Through a series of acquisitions, Kennametal now distributes a wide range of industrial products from other manufacturers.

Kennametal also used its information systems to force its various European subsidiaries to work more cooperatively. All of them are tied into the data center here through a communications network administered by British Telecom, which Kennametal turned to for help in designing the system and getting it approved by telephone authorities in Europe.

More recently, Kennametal's use of electronic data interface, known as E.D.I. among information managers, has cut the costs of administering transactions with the General Electric Company's aircraft components business in Albuquerque, N.M., by 96 percent. G.E.'s electronic orders for tools go directly to Kennametal's computers, which automatically do the paperwork, issue notices of when the tools will be shipped and send bills. Employees first become a part of the transaction when workers in an Albuquerque warehouse get a printed order to pack and ship the tools. The payoff: Kennametal Albuquerque has annual sales of $861,000 per employee, compared with an average of $254,000 for members of the Industrial Distribution Association.

"Kennametal was unusual among suppliers in being pro-active on E.D.I.," said Trevor Pokorney, part of a team at Carnegie-Mellon University's Graduate School of Industrial Administration that has studied the company's information technology management. "The trend so far in industry has been for big customers, like the auto companies, to force E.D.I. on suppliers."

Mr. Turko says he considered Kennametal "a fast follower" rather than a leader in most aspects of information technology. The company has declined invitations from I.B.M., A.T.& T. and others to be a test site for the newest technologies.

"What we are really good at is that when we decide to do something we are incredibly fast diffusers of technology," Mr. Turko said. For example, the entire North American sales force was equipped with personal computers and trained to use them for electronic mail, sales reports, record-keeping, and product availability inquiries within one year of the first pilot program.

Mr. Turko and his colleagues are cautious about their ability to maintain their strategic edge in the 1990's. At the time Kennametal began its plunge into information technology, systems based on large mainframe computers offered the greatest flexibility and power. Today, Kennametal executives say, distributed computing in which many smaller computers and peripheral devices are linked has many advantages. No one is quite sure how well Kennametal's centralized system can adapt.

Photo: John W. Turko devoted three years to creating an information system to help customers and managers determine within seconds what products were available at Kennametal sites around the country. (Barnaby J. Feder/The New York Times)